Capital Economics: Time to return to emerging equities?

Evidence suggests the worst may be over for emerging market equities, according to new research by Capital Economics.

With emerging equities dropping after the lack of clarity surrounding US monetary policy and fears over the Chinese economy, Capital Economics chief markets economist John Higgins believes fortunes may soon improve for the asset class.

Higgins says: “The prospect of a tapering of the Fed’s asset purchases is surely now discounted, economic growth should still eclipse that of the developed world, and valuations in the main do not appear particularly stretched in other reasons.”

Weakening sentiment towards to emerging markets has hit funds focused on the space. The IMA Global Emerging Markets sector captured just £12.8m in net inflows during June 2013 – a far cry from January when it was the best selling sector with net retail sales of £223m.

While still underperforming developed market equities, new data suggests some lost ground has been recovered in the past month – with emerging market equities returning 2.1 per cent compared with their 5 per cent over the past three months.

Within emerging market equities, Latin America has recorded the best return over the past month with a 3.7 per cent gain – compared with the 7.9 per cent fall over the past three months.

Emerging Asia returned 1.2 per cent in the last month, compared with a 4.9 per cent decline over the three months.

With recent trade data suggesting a strong yet slower-than-expected recovery in China, Capital Economics predicts the success of the region’s equities will still very much be determined by US monetary policy.

However, the consultancy points out that the Federal Reserve is likely “to tread extremely carefully” when withdrawing stimulus, which could bolster sentiment around emerging equities.